Dell Expects Annual Margin Decline Amid Rising AI Server Costs and Soft PC Demand
Dell Technologies (DELL.N) has projected a decline in its adjusted gross margin rate for fiscal year 2026, citing higher production costs for artificial intelligence (AI) servers and ongoing challenges in the personal computer (PC) market. Despite strong demand for AI-driven computing solutions, the increased cost of manufacturing these specialized servers has weighed on the company’s overall profitability.
Following the announcement, Dell’s shares fell by approximately 2% in extended trading on Thursday, even as the company disclosed a $10 billion increase in its share buyback program.
AI Server Growth vs. Margin Pressure
Dell has positioned itself as a major player in the AI server market, developing systems powered by Nvidia’s (NVDA.O) high-performance chips, which are used to train large language models (LLMs), such as those that support AI chatbots like ChatGPT.
This has boosted demand for Dell’s AI infrastructure, placing it in direct competition with companies like Super Micro Computer (SMCI.O). The company forecasted $15 billion in annual revenue from AI server shipments, marking a 53% increase compared to the $9.8 billion in revenue for the year ending January 31.
However, the expansion of AI-driven server production has come at a significant cost, leading to a decline in profitability. Dell estimates that its adjusted gross margin rate will decrease by approximately 100 basis points due to the higher expenses associated with manufacturing these advanced systems.
Additionally, Dell revealed that as of February 27, its AI server backlog had reached $9 billion, underscoring strong market demand. The company also secured a deal with xAI, Elon Musk’s artificial intelligence startup, further solidifying its role in the rapidly evolving AI landscape.
Financial Performance and Market Outlook
Despite margin concerns, Dell provided a strong annual earnings forecast, expecting adjusted profits of $9.30 per share, surpassing analysts’ projections of $9.23 per share, based on LSEG data. The midpoint of its annual revenue forecast stood at $103 billion, aligning with market expectations.
However, the company faced mixed financial results for the fourth quarter ending January 31:
- Revenue stood at $23.93 billion, missing the estimated $24.56 billion.
- Adjusted earnings per share (EPS) came in at $2.68, exceeding forecasts of $2.53 per share.
- Revenue from its Infrastructure Solutions Group (ISG)—which includes storage, software, and server offerings—rose by 22% to $11.35 billion.
- Revenue from its Client Solutions Group (CSG)—which includes PC sales—increased by only 1% to $11.88 billion, reflecting weaker demand.
While Dell’s AI-driven business continues to expand, the PC segment remains sluggish, mirroring a broader trend in the technology industry.
Tariff Uncertainty Could Impact Pricing Strategy
A key challenge that could further impact Dell’s financial performance is the looming U.S. trade tariffs on Chinese imports.
The Biden administration has proposed sweeping tariff adjustments that could affect multiple industries, including technology, automotive manufacturing, and essential services. Dell stated that it is closely evaluating the executive orders to determine their impact on both business operations and customer pricing.
“Whatever tariff we cannot mitigate, we view that as an input cost. As our input costs go up, it may require us to adjust prices,” said Dell’s Chief Operating Officer Jeff Clarke.
If the tariff changes lead to higher production costs, Dell may have to pass these costs onto customers, potentially impacting demand and sales volumes.
PC Market Faces Further Weakness
The global PC market has been struggling over the past two years due to declining consumer demand, inflationary pressures, and economic uncertainty.
On Thursday, research firm International Data Corporation (IDC) lowered its forecast for traditional PC shipments in 2025 and beyond, citing the impact of U.S. tariffs on China and weaker market sentiment.
Dell, like many of its competitors, has faced challenges in sustaining growth in its PC division. Although the company reported a slight 1% increase in PC revenue, the overall market outlook remains uncertain.
With consumers and businesses holding onto their existing devices for longer periods, the demand for new PCs has not rebounded at the expected rate. Many industry analysts anticipate that AI-powered PCs could be a key driver of future growth, but widespread adoption is still in its early stages.
What Lies Ahead for Dell?
While Dell continues to strengthen its AI server business, it must navigate key challenges, including:
- Maintaining profitability amid rising AI server production costs
- Managing potential price increases due to U.S.-China trade tariffs
- Addressing ongoing weaknesses in the PC market
Analysts believe that Dell’s AI business will remain a significant growth driver, but the declining margin rates and external economic factors could impact short-term earnings performance.
As the technology landscape evolves, Dell’s ability to innovate, manage costs, and adapt to market changes will determine its long-term success in both the AI and PC segments.
